Value of Shareholder Activism: Evidence from the Switchers

Abstract

This paper measures the value of shareholder activism focusing on outside block holders who switch their investment purpose from passive to active. Unlike the usual 5% ownership disclosure, switch does not necessarily involve additional share purchase and thus provides a cleaner test in effectively ruling out alternative theories such as stock picking skills, private information, or herding. We apply the test to outside block holders in the Korean market, which experienced a concentrated number of switchers in the first half of 2005 when the government adopted a new disclosure rule. Using this natural experimental setting with an exogenous shock, we find that firms with high cash flows but low dividend payouts typically become the targets of such a switch. Target price reaction is significantly positive around the time of the switch disclosure and this effect is more pronounced when the switcher is foreign or declares to use a wider scope of activist measures. Following the switch, we find evidence of relative increases in dividend payouts, but no evidence of excessive trading volume or a quick sell out of the switchers.